Tags: Portugal | Bonds | Yields | Demand

Portugal Sells $1 Billion in Bonds as Higher Yields Fuel Demand

Wednesday, 22 September 2010 10:09 AM

Portugal sold 750 million euros ($1 billion) of bonds as yields driven higher by concern that the government will struggle to trim its deficit fueled demand.

The debt agency sold 450 million euros of securities due October 2014 to yield 4.695 percent, a jump from the 3.621 percent at the July 28 auction. Investors bid for 3.5 times the amount offered, more than the 3.1 times in July. Portugal also sold 300 million euros of 10-year bonds, leaving the total for the auction at the low end of the 750 million-euro to 1 billion- euro range set for the sale. Demand also rose for that debt.

Portuguese bonds slumped this week on concern that the government was not making as much progress trimming its budget deficit, the European Union’s fourth-biggest, as other countries affected by the fallout from the Greek debt crisis such as Ireland and Spain. The yield on Portuguese 10-year bonds rose to a record relative to benchmark German bunds on Sept. 20 as the central government shortfall widened in the first eight months.

“The auction seems to have been taken down without too much difficulty after the wider spreads provided an opportunity,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and money managers. “It’s slightly disappointing they didn’t manage” to sell the maximum intended amount, he said.

Fully Funded

Portugal has already funded around 90 percent of its financing needs for this year, Finance Minister Fernando Teixeira dos Santos said on Sept. 10, and the country doesn’t face a bond redemption until next year.

The spread between the yield on Portugal’s 10-year bonds and those of Germany, Europe’s benchmark, fell to 382 at 12:40 p.m. in Lisbon from as high as 398 basis points earlier in the day. It widened to 399 basis points on Sept. 20, the most since Bloomberg began collecting the data in 1997.

The auction came one day after Ireland sold 1.5 billion euros of bonds and Spain sold 7 billion euros in bills. Firm demand for that debt helped narrow the yield premiums between Irish and Spanish debt over German bonds yesterday even as borrowing costs at the sale increased for both countries.

Europe’s sovereign debt crisis took hold at the end of 2009 after Greece’s newly-elected socialist government said the budget deficit was twice as big as the previous administration disclosed. In April, Greece asked to tap an EU-International Monetary Fund 110 billion-euro loan facility after being shut out of debt markets. The EU then passed a broader 750 billion- euro backstop for the rest of the euro region.

Austerity Plans

To avoid Greece’s fate, EU governments have adopted austerity measures including wage cuts for public workers and higher taxes to speed deficit-reduction efforts. Portugal has made less progress reining in its shortfall than Spain, Greece and Ireland, contributing to the jump in bond yields.

The austerity measures have fueled expectations at banks that spreads with Germany will narrow in the months ahead. Yields on bonds of Greece, Spain, Ireland and Portugal will fall to within 2.2 percentage points of benchmark German bunds on average in the next two years from 4.61 percentage points last week, according to a Bloomberg News survey of 15 banks that trade directly with Germany’s debt agency.

Teixeira dos Santos on Sept. 10 said Portugal doesn’t need to tap the euro-region’s rescue fund, following the increase in borrowing costs. Klaus Regling, the head of the bailout fund known as the European Financial Stability Facility, this week said he doesn’t expect any country will need to tap the fund.

Deficit Targets

The Portuguese government is trying to cut its budget gap after posting a deficit of 9.3 percent of gross domestic product in 2009, the fourth-highest in the 16-country euro region after Ireland, Greece and Spain. The government aims to narrow the shortfall to 7.3 percent this year and intends to meet the EU limit of 3 percent in 2012, a year earlier than in a previous plan.

Portugal’s central government’s deficit rose to 9.19 billion euros in the first eight months of this year from 8.74 billion euros in the same period last year, the Finance Ministry said Sept. 20. Tax revenue gained 3.3 percent, more than budgeted, and spending increased 2.7 percent, in line with budget estimates, the ministry said.

By contrast, Spain slashed its seven-month central government deficit in half from a year earlier. Ireland and Greece also reduced their budget deficits in the first eight months.

‘Robust Plan’

“The latest deficit figures put more pressure on the government to come up with a credible and robust plan to bring down the deficit when the state budget for 2011 is presented next month,” Diego Iscaro, an economist at IHS Global Insight in London, said in an e-mail to investors. “The main challenge will be to achieve fiscal consolidation without driving the economy back into a recession.”

Portugal’s minority Socialist government, led by Prime Minister Jose Socrates, this year has pledged to reduce hiring of public workers, while raising taxes and postponing public infrastructure spending.

The investment and spending cuts may hurt an economy that has barely grown for a decade, with the expansion averaging less than 1 percent annually since 2000. The Bank of Portugal said in July that growth may slow to 0.2 percent in 2011 from 0.9 percent this year. The government forecasts economic growth of 0.7 percent for this year.

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Portugal sold 750 million euros ($1 billion) of bonds as yields driven higher by concern that the government will struggle to trim its deficit fueled demand. The debt agency sold 450 million euros of securities due October 2014 to yield 4.695 percent, a jump from the 3.621...
Wednesday, 22 September 2010 10:09 AM
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